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Are New Hires Jumping to the Head of the Line for Raises?

Posted by Staffing Advisors on November 14, 2022

Workers changing jobs to maximize their paycheck is nothing new. But this year, a few twists present real challenges for employers. There are twice as many jobs as people looking, inflation accelerated faster than salary budgets, and more organizations are posting salaries publicly than ever before. New hires are expecting, and often getting, higher pay than current employees; suddenly, maintaining your salary budget has become incredibly complex. Let's dive into some factors driving this trend and what you can do to remain competitive while hiring.

Job Switchers Are Front Loading Cost-of-Living Raises

A recent Conference Board study showed that internal raises are hovering around 3%, lagging far behind the galloping inflation rate—reported at 6.2% for the first half of 2022, up from 2.6% in 2021. Even if your organization is prepared to make a cost-of-living adjustment eventually, it's not likely that you can immediately bridge the gap for current employees. It often takes a couple of years to reconfigure your budget for a change this size.

Staffing Advisors Vice President of Client Engagement Aileen Hedden is seeing many nonprofits and associations working through this right now, "I've talked to several clients who are readjusting salaries across the organization, trying to catch up to the current market. But many of them had fallen behind two or three years ago, so catching up now is even more daunting."

According to a Pew Research Center report study, in 20-21, "…the median worker who changed employers saw real gains in earnings in both periods, while the median worker who stayed in place saw a loss." New hires negotiating for higher salaries are essentially jumping the line, front-loading their eventual cost of living raise before their colleagues catch up. This creates an internal equity challenge and heightens turnover risk for employers who are slow to adapt.

The salary of the last person who held a position may be considerably less than the salary a new candidate will accept. These higher "replacement costs" create disparities that make current employees feel like they are falling even further behind—almost like their loyalty is being penalized.

Pay Transparency Is Here to Stay

Pay transparency—publicly posting salaries for new jobs—is becoming the norm; it is the law in a growing number of states and cities. One outcome is that job seekers have increased negotiating power with a clearer picture of their market value and what similar roles are paying.

At the same time, many organizations struggle to manage internal equity surrounding pay. In a Quartz article featuring a recent study by Tomasz Obloj of HEC Paris and Todd Zenger from the University of Utah's business school, Obloj notes, "once wages and rewards become transparent, there is both internal and external pressure to close those gaps. But the extent to which making pay transparent helps erase unfairness was remarkable."

Our own research shows that disclosing pay in job advertising does not significantly limit the number of people applying to a position. Staffing Advisors Project Director Lilly Khan shared what she hears from candidates, "If a posted salary is modest, candidates who are interested in the job still reach out. But they will tell me that the salary is an issue up front and that they will need to talk it through. That's when we start talking about things like total compensation, employee engagement, support for well-being, and career advancement. They want a full picture of benefits, not just salary."

Conversely, not disclosing pay lowers the attention your ads will receive. Many job seekers now ignore job postings that do not include salary, while many job boards are now posting inaccurate "guesstimated" salary ranges if the employer does not share a specific range.

Current Employees Don't Have to Pay the Price

In the long term, employers who post wages below the 50th percentile will likely be forced to raise the salaries posted in their ads just to compete. Employers can expect to be locked into this salary arms race for the foreseeable future; if you can offer higher salaries, now may be the time to put your best foot forward.

But it's not all doom and gloom for organizations constrained by tight salary budgets. It's entirely possible to hire terrific people at a fair salary in the current job market while respecting the tenure of your current employees.

Several Staffing Advisors clients have adopted a performance review process that weighs tenure as part of the merit raise evaluation. Added to the annual cost-of-living adjustment, this keeps new hires and existing employees on a more level playing field and makes the organization less vulnerable to dramatic shifts in inflation and the job market.

Compensation expert, President and CEO of SmithPilot Rebecca Pilot, shared, "Pay equity is top of mind for most employers and employees. In order to maintain internal equity, you have to monitor it throughout the year when hiring new employees, making promotions, or any other changes to salaries. And it's important to communicate to existing employees that pay equity is a priority."

Raising Salaries Is Only One Strategy In This Race

Staffing Advisors President and Founder Bob Corlett adds, "This is a multiplayer game—every employer offers a unique value proposition that attracts some candidates and repels others. Ultimately, your success in recruiting depends on how well you understand and meet the needs of your potential future employees. For you to get what you want from a new hire, the new employee needs to get what they want. So, you need to think hard about who would find your work (and compensation package) to be their most attractive career option."

As you think about your employer value proposition, consider a recent Pew research study, where participants pointed to several reasons for leaving a job besides low pay, including a lack of opportunities for advancement, childcare, flexible work options, and overall benefits. A recent study from MIT cited toxic work culture among the top reasons people left jobs in 2021. Salary is important, but not to the exclusion of these other factors.

Here at Staffing Advisors, we've seen clients succeed in this job market by expanding their employee engagement programs, focusing on well-being, and getting creative about what they can offer. An intentional and well-advertised work culture can go a long way to balancing out salary constraints.

Rebecca Pilot emphasizes this point, "It’s up to the employer to expand the conversation from just salary to the total rewards package—cash compensation, benefits, and non-monetary benefits. Employers would be served well to define and articulate all the offerings for employees, like rewarding and engaging work, an opportunity to make a difference, etc."

What this looks like for every organization is different. For some job seekers, a calendar of social events, strong values alignment, and a sense of togetherness are incredibly attractive. For others, flexible hours with no requirements to meet in person are exactly the right fit. A great place to start is by surveying your current employees to find out what's working for them and what they'd like to change.

It's Time to Rethink Your Employer-Employee Compact

As an employer, be ready to negotiate with well-informed candidates who will likely weigh your job offer against several others. Be as competitive and transparent as possible with your salary. And make sure your job ads and interview process convey the complete picture of what you offer a potential new hire and what you are asking for in return—all aspects of your employee-employer compact.

Offering higher pay is one strategy to stay competitive now. Creating an environment that meets the evolving needs of your employees will keep you that way into the future.

Need help communicating your organization's value proposition to job seekers? Check out 6 Steps to Writing Job Descriptions That Attract Great Candidates. And stay tuned! We'll have more coming soon on how employee expectations are changing beyond salary and standard benefits.


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Topics: Job Market, Negotiating Salary for New Hires